2. Demand and Supply analysis
• Law of demand-assumptions and exceptions
• Demand schedule and demand curve
• Determinants of demand
• Changes and variations in demand
• Demand elasticity-definition, types, methods of measurement of elasticity,
• Income elasticity of demand, types.
• Law of supply-assumptions and exceptions
• Supply schedule and supply curve
• Determinants of supply, changes and variations in supply
• Supply elasticity-definition, types, determinants
• Methods of measurement of supply
3. Law of demand
• The law of demand states that other factors being constant, price and
quantity demand of any good and service are inversely related to
each other. When the price of a product increases, the demand for
the same product will fall.
• Law of demand explains consumer choice behavior when the price
changes.
4. • In the market, assuming other
factors affecting demand being
constant, when the price of a
good rises, it leads to a fall in
the demand of that good.
• This is the natural consumer
choice behavior.
• This happens because a
consumer hesitates to spend
more for the good with the fear
of going out of cash.
5. Assumptions to law of demand
The statement of the law of demand, demonstrates
that that this law operates only when all other things
remain constant. These are then the assumptions of
the law of demand. We can state the assumptions of
the law of demand as follows:
.
6. 1. Income level should remain constant
The law of demand operates only when the income level of the buyer
remains constant. If the income rises while the price of the
commodity does not fall, it is quite likely that the demand may
increase. Therefore, stability in income is an essential condition for
the operation of the law of demand
7. 2. Tastes of the buyer should not alter
Any alteration that takes place in the taste of the consumers will in all
probability thwart the working of the law of demand. It often
happens that when tastes or fashions change people revise their
preferences. As a consequence, the demand for the commodity which
goes down the preference scale of the consumers declines even
though its price does not change.
8. 3. Prices of other goods should remain constant
Changes in the prices of other goods often impinge on the demand
for a particular commodity. If prices of commodities for which
demand is inelastic rise, the demand for a commodity other than
these in all probability will decline even though there may not be any
change in its price. Therefore, for the law of demand to operate it is
imperative that prices of other goods do not change.
9. 4. No new substitutes for the commodity
If some new substitutes for a commodity appear in the market, its
demand generally declines. This is quite natural, because with the
availability of new substitutes some buyers will be attracted towards
new products and the demand for the older product will fall even
though price remains unchanged. Hence, the law of demand operates
only when the market for a commodity is not threatened by new
substitutes.
10. 5. Price rise in future should not be expected
If the buyers of a commodity expect that its price will rise in future
they raise its demand in response to an initial price rise. This behavior
of buyers violates the law of demand. Therefore, for the operation of
the law of demand it is necessary that there must not be any
expectations of price rise in the future.
11. 6. Advertising expenditure should remain the same
If the advertising expenditure of a firm increases, the consumers may
be tempted to buy more of its product. Therefore, the advertising
expenditure on the good under consideration is taken to be constant.
12. Exceptions to the law of demand
Law of demand has the below exceptions and is not applicable to
below cases:
13. 1. Apprehensions about the future price
• When consumers anticipate a constant rise in the price of a long-
lasting commodity, they purchase more of it despite the price rise.
They do so with the intention of avoiding the blow of still higher
prices in the future. Likewise, when consumers expect a substantial
fall in the price in the future, they delay their purchases and hold on
for the price to decrease to the anticipated level instead of purchasing
the commodity as soon as its price decreases. These kinds of choices
made by the consumers are in contradiction of the law of demand.
14. 2. Status goods
• The law does not concern the commodities which function as a
‘status symbol’, add to the social status or exhibit prosperity and
opulence e.g. gold, precious stones, rare paintings and antiques, etc.
Rich people mostly purchase such goods as they are very costly.
15. 3. Giffen goods
• If there is an inferior good of which the positive income effect is
greater than the negative substitution effect, the law of demand
would not hold. For example, when the price of potatoes (which is
the staple food of some poor families) decreases significantly, then a
particular household may like to buy superior goods out of the
savings which they can have now due to superior goods like cereals,
fruits etc., not only from these savings but also by reducing the
consumption of potatoes. Thus, a decrease in price of potatoes
results in decrease in consumption of potatoes. Such basic good items
consumed in bulk by the poor families, generally fall in the category
of Giffen goods.
16.
17. Law of Supply
• Law of supply states that other factors remaining constant, price and
quantity supplied of a good are directly related to each other.
• Law of supply states that other factors remaining constant, price and
quantity supplied of a good are directly related to each other. In other
words, when the price paid by buyers for a good rises, then suppliers
increase the supply of that good in the market.
18. • Law of supply depicts the
producer behavior at the time of
changes in the prices of goods
and services. When the price of a
good rises, the supplier increases
the supply in order to earn a
profit because of higher prices.
• The diagram shows the supply
curve that is upward sloping
(positive relation between the
price and the quantity supplied).
When the price of the good was
at P3, suppliers were supplying
Q3 quantity. As the price starts
rising, the quantity supplied also
starts rising.
19. Assumptions
• Natural Factors: The supply of agricultural product is affected
adversely by weather, natural calamities like flood, cyclone etc. On
the other hand adequate rainfall and good weather etc. increase
supply.
• Method of Production: Method of production affects the supply of a
commodity by reducing the cost of production. Due to modern
method of production cost of production diminishes and the price of
the commodity almost remains constant. As a result profit margin
rises. Being lured by the windfall profit producers produce more and
offer more for sale.
20. • Fall in the Factor Prices: Supply of a commodity also
increases due to the fall in the price of factors of
production meant for its production. The prices of
factors of production constitute a part of the total
cost of production. Due to the fall in the factor cost
production cost is reduced with reduced costs the
supply of goods rises.
• Prices of other goods: There are certain commodities
which are in nature of substitutes and
complementary. In case of a substitute the producer
will substitute the commodity whose price has fallen.
The resources will be diverted from the supply of
substitute commodity whose price has fallen.
21. • Number of firms: If the number of firms producing
commodity increases, the market supply curve shifts
downward. In the short run the existing firms reap
abnormal profit. But lured by the abnormal profit the
competitive firms enter the market to produce the
same commodity. This raises the supply; likewise the
competitive firms leave the market due to loss. So the
supply diminishes.
• Expectation of future price: The supply of a
commodity depends on the future expectation of
price. If the price in expected to fall, the sellers will
supply more at a low price and if the price is expected
to rise in future, the seller will sell less and store for
future sale.
22. Exceptions to the Law of Supply
• The law of supply states that other things being equal, the supply of a
commodity extends with a rise in price and contracts with a fall in
price. There are however a few exceptions to the law of supply.
• Exceptions of a fall in price - If the firms anticipate that the price of
the product will fall further in future, in order to clear their stocks
they may dispose it off at a price that is even lower than the current
market price.
• Sellers who are in need of cash - If the seller is in need of hard cash,
he may sell his product at a price which may even be below the
market price.
23. • When leaving the industry - If the firms want to shut
down or close down their business, they may sell
their products at a price below their average cost of
production.
• Agricultural output - In agricultural production,
natural and seasonal factors play a dominant role.
Due to the influence of these constraints supply may
not be responsive to price changes.
• Backward sloping supply curve of labor - The rise in
the price of a good or service sometimes leads to a
fall in its supply. The best example is the supply of
labor. A higher wage rate enables the worker to
maintain his existing material standard of living with
less work, and he may prefer extra leisure to more
wages.
24. Demand schedule
• In economics, the demand schedule is a table of the quantity
demanded of a good at different price levels. Thus, given the price
level, it is easy to determine the expected quantity demanded. This
demand schedule can be graphed as a continuous demand curve on a
chart having the Y-axis representing price and the X-axis representing
quantity.
28. • A demand schedule is typically used in conjunction with a
supply schedule showing the quantity of a good that
would be supplied to the market at given price levels.
• Then, graphing both schedules on a chart with the axes
described above, it is possible to obtain a graphical
representation of the supply and demand dynamics of a
particular market.
• Market will reach equilibrium where the supply and
demand schedules intersect.
• At this point, the corresponding price will be the
equilibrium market price, and the corresponding quantity
will be the equilibrium quantity exchanged in the market.
33. • An elastic demand is one in which the change in
quantity demanded due to a change in price is large.
• An inelastic demand is one in which the change in
quantity demanded due to a change in price is small.
38. Economics of production and Growth
• Production function-types of production economies
• Diseconomies of scale
• Features of growth
• Growth v/s Development
• Determinants of growth (economic and non-economic)
• Stages of growth
• Growth strategy- steady state and big – push growth strategy;
balanced and unbalanced growth
39. Production Function
• In economics, a production function relates physical output of a
production process to physical inputs or factors of production.
• The primary purpose of the production function is to address
allocative efficiency in the use of factor inputs in production and the
resulting distribution of income to those factors, while abstracting
away from the technological problems of achieving technical
efficiency, as an engineer or professional manager might understand
it.
40. Diseconomies of scale
• An economic concept
referring to a situation in
which economies of scale
no longer function for a
firm.
• Rather than experiencing
continued decreasing costs
per increase in output,
firms see an increase in
marginal cost when output
is increased.
41. • Diseconomies of scale can sometimes occur for the
follow reasons:
1. A specific process within a plant cannot produce the
same quantity of output as another related process. For
example, if in a product required both gadget A and
gadget B, diseconomies of scale might occur if gadget B
is produced at a slower rate than gadget A.
2. As output increases, costs of transporting the good to
distant markets can increase enough to offset any
economies of scale. For example, when a firm has a
large plant capable of producing a large output located
in one location, the more the firm produces, the more it
needs to ship to distant locations.
42. Economic Growth
• Economic growth is defined as an increase in an economy's ability to
produce goods and services.
• An increase in an economy's ability to produce goods and services,
therefore increasing economic output, is possible under two
conditions:
1. More resources are used in the economy.
2. Existing resources are used more efficiently.
43. • Economic growth is measured in changes in what is
called 'gross domestic product' (GDP).
• This is a measure of everything that has been
produced in an economy.
• Gross National Product (GNP) was the system used
before GDP was accepted internationally.
44. Barriers to economic growth
• We have seen earlier that the ability to grow an economy
depends on using more resources (land and labor, for
example), or on more efficient use of these resources.
• The correct term for the resources used is: factors of
production.
• There are four factors of production: land, labor, capital
and enterprise.
• Economic growth depends on the quality and availability
of these factors.
• If any of the factors of production suffers from a lack of
quality or availability, then economic growth will not be as
great as its potential.
45. So what can cause these factors of production to be of low
quality or unavailable?
• Insufficient or contaminated land
• Substandard labor supply
• Poor technical infrastructure, such as roads and communications
• Poor social infrastructure, such as schools or hospitals
• Poor industrial infrastructure, such as factories and machinery
46. Economic Development v/s Economic Growth
• Economic Growth is a narrower concept than economic development.
It is an increase in a country's real level of national output which can
be caused by an increase in the quality of resources (by education
etc.), increase in the quantity of resources & improvements in
technology or in another way an increase in the value of goods and
services produced by every sector of the economy. Economic Growth
can be measured by an increase in a country's GDP (gross domestic
product).
47. • Economic development is a normative concept i.e. it
applies in the context of people's sense of morality (right
and wrong, good and bad).
• The definition of economic development given by Michael
Todaro is an increase in living standards, improvement in
self-esteem needs and freedom from oppression as well
as a greater choice.
• The most accurate method of measuring development is
the Human Development Index which takes into account
the literacy rates & life expectancy which affect
productivity and could lead to Economic Growth.
• It also leads to the creation of more opportunities in the
sectors of education, healthcare, employment and the
conservation of the environment. It implies an increase in
the per capita income of every citizen.
48.
49. Types of Growth Strategies
• Balanced growth – Simultaneous investment in a number of
industries so that there is a balanced growth of different industries
• Unbalanced growth – Concentration of investment in certain strategic
industries rather than an even distribution of investment among the
various industries
50. • Big Push Strategy – A big push is needed to overcome
the initial inertia of a stagnant economy. There is a
minimum level of resources that must be devoted to
a development programme if it is to have any chances
of success.
• Balanced, Unbalanced, Big Push – No single strategy
will take us to the goal of economic development. Not
only has the strategy to be changed from time to time
as the situation may require, but it may be necessary
sometimes to strike a balance between alternative
strategies.
